I was over a Quora and came across an interesting question – Why do Start Ups Fail?
The answers are worth reading in detail but I thought I would put my spin on it. Several contributors are absolutely sure that 95% of start ups fail for one reason which they then postulate. Unfortunately many of them cite different factors.
Clearly in the case of one company, there may have been a dominant reason. I would like to put forward six areas which are all linked in many complex ways. The essence of this is launching a business is a very time consuming and complex exercise, if you don’t get your act together – you will almost certainly fail.
So lets start with…Management
Investors will tell you than management is the most important factor they consider when evaluating whether to invest in a deal. Failures of management are a frequent cause of start up failure. This might be personality led – they fall out. It may be lack of follow through – they give up and quit before they are successful. All managers make bad decisions and mistakes – its just a bit more critical if your runway is short and the plane then fails to take off. I think that lack of management commitment is probably the least likely reason that start ups fail but lack of planning and preparation – running before they can walk is certainly a factor. The simple message for management here is make sure that you do as much research and planning as possible. But then I guess that may not be the nature of true entrepreneurs!
So lets look at the Product…
Early stage investors essentially take product risk. Can the product be produced within the existing financial and time constraints. Will it work? Will it do what needs to do? Can it address the problem it is designed to address? Can it be sufficiently differentiated to at least find an initial customer. Very few investors want to take the pre-revenue risk and the first sale is the critical validation of the product.
But does one sale mean there is a Market?
One Swallow does not make a summer. So the next step in the start up journey is taking the product to market. This means investment and scaling up, reaching out to potential customers. However, is there really a market for this product/service (lets use the work product to mean both)? There are outstandingly creative people out there inventing new products on a daily basis. The fact that, proportionately, on a few of them are successful, suggests to me that for a least a significant proportion there is no market.
A good guide is to ask yourself – where is the pain? No Pain, No Solution.
The next step is Scale…
Investors are always keen to investigate the size of the market and can the product be scaled to address it. The best products address a very large market and are easy to scale. This is a major factor why internet and software companies are so much easier to finance than people based businesses.
The challenge then is scaling the business to address the market. This growth phase comes with a great deal of internal corporate pain. Investment in sales, marketing, production, sales, additional management, finance and IT systems all require management time and expertise. Often early stage entrepreneurs recognise their own limitations and bring in “experienced” or “professional” management to help them overcome these challenges.
This all requires Capital…
Start Ups are always (well nearly always) short of Capital. Revenues may be limited, profits non existence. The “Burn Rate” is the term used to described the act of consuming cash as you build out the business. In this process, the company is racing against itself, to sell its products before the money runs out.
The extent to which companies have funding can be measured in time – at this rate of capital consumption, how many months can the company operate until the money runs out – assuming no further income. Failure comes when the management of the company fail to ensure the company has sufficient capital between stages of funding. A good rule of thumb is to raise 18 months money (at current burn rate) at each stage of funding. One of the worst things a company can do is to run short of money and go back to shareholders (existing and new) to raise additional, unscheduled capital.
Is there a common theme? Execution…?
Company’s can have plans and strategy, get products, quality management and a great market opportunity and still fail. The issue here is execution. It is important to realise that on a day to day basis there are lots of issues, questions and challenges to be addressed. This has to be done in a timely and effective way. This is an early lesson for management. On one side of the coin, there is no process for handling the unexpected and the management just wing it. On the other hand, every unexpected issue can become the centre of debate and meetings – the management fiddle while the company (and the money burns). There is no prescriptive answer to this issue. The management need to learn how to prioritise and learn from their mistakes – continually.
I have referred to the idea of Learning Management. Having regular, scheduled meetings is a good discipline but the management should be continually evaluating if there is a better, quicker, more cost effective way to act and be prepared to be flexible. It is interesting to watch some start-ups who realise at a point that their product or business model is not working but they “Pivot”, change their approach and subsequently become successful.
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